1 Deal structure
1.1 How are private and public M&A transactions typically structured in your jurisdiction?
Private M&A transactions are usually structured as acquisitions through share transfers and share subscriptions. In certain instances, however, transactions are structured in the form of asset acquisition and amalgamation.
A stock market was recently established in Ethiopia but trading has not yet commenced. For this reason, public M&As in the context of a stock market are yet to exist.
1.2 What are the key differences and potential advantages and disadvantages of the various structures?
Share transfers and share subscriptions are subject to clear procedural rules. However, the tax implications of share transfers and share subscriptions vary depending on multiple factors, such as:
- the existence of a gain on the share transfer; or
- the issuance of shares at a premium.
There is ample practice of share transfers and share subscriptions in private M&As. For this reason, the process is relatively straightforward.
There is also sufficient practice and clear regulations with regard to the implementation of asset acquisitions. However, depending on the value of the assets to be acquired in light of the total assets of the company, the tax clearance process may take a few months. Furthermore, if the asset in question is an immovable asset or a special type of movable (eg, machinery or vehicles), the transfer of title will require various approvals.
Amalgamations and mergers are not common in Ethiopia. However, there are a few notable experiences of amalgamations in the country and the regulations on this matter were recently updated. Compared to the other structuring options, amalgamation involves more regulatory approvals and publication requirements.
1.3 What factors commonly influence the choice of sale process/transaction structure?
The factors that commonly influence the choice of transaction structure include:
- the tax implications of the possible transaction structure;
- the time it will take to close the transaction; and
- restrictions on the business/investment sector and associated regulatory approvals.
2 Initial steps
2.1 What documents are typically entered into during the initial preparatory stage of an M&A transaction?
The typical documents entered into at the initial preparatory sate include:
- a non-disclosure agreement;
- the term sheet; and
- in the context of amalgamations, the resolution of the corporate entities which will be parties to the transaction.
2.2 Are break fees permitted in your jurisdiction (by a buyer and/or the target)? If so, under what conditions will they generally be payable? What restrictions and other considerations should be addressed in formulating break fees?
There are no regulatory restrictions on break fees. If the parties agree to conditions that may trigger break fees, the agreement will be governed by contract law.
2.3 What are the most commonly used methods of financing transactions in your jurisdiction (debt/equity)?
Both debt and equity are commonly used methods of financing transactions in Ethiopia.
2.4 Which advisers and stakeholders should be involved in the initial preparatory stage of a transaction?
It is prudent to involve legal and financial advisers at the preparatory states of a transaction. It is critical to obtain sound legal advice in terms of the structure of the transaction and the regulatory requirements. It is equally important to involve financial advisers in the transaction with regard to valuation, market context and tax implications.
2.5 Can the target in a private M&A transaction pay adviser costs or is this limited by rules against financial assistance or similar?
There are no restrictions that would prevent the target in a private M&A from making the relevant payments to advisers. However, for tax purposes, such payments must satisfy the tax law requirements to be treated as deductibles of the target.
3 Due diligence
3.1 Are there any jurisdiction-specific points relating to the following aspects of the target that a buyer should consider when conducting due diligence on the target? (a) Commercial/corporate, (b) Financial, (c) Litigation, (d) Tax, (e) Employment, (f) Intellectual property and IT, (g) Data protection, (h) Cybersecurity and (i) Real estate.
Certain resolutions passed by shareholders must be notarised and authenticated before a public notary in Ethiopia. Authentication requirements also apply to foreign documents. It is important to identify issues that require decisions of the shareholders to be made through an authenticated resolution.
Foreign debt facilities and security agreements must be preapproved and subsequently registered by the National Bank of Ethiopia. With regard to movable property, there is a collateral registry through which securities on movable property are registered.
Except for decisions of the Cassation Bench of the Supreme Court, information on litigations is not publicly accessible.
In addition to the annual tax reporting requirement for which companies must obtain tax clearance, specific transactions such as asset transfers that trigger tax liability should be considered. A tax audit covering a minimum period of five years is also critical.
A transaction that results in the transfer of the company as a going concern does not affect the terms of the target's employment contracts with its employees. However, a transaction that results in the relocation of the business or the assets may affect employment contracts.
(f) Intellectual property and IT
Ethiopia has legislation protecting trademarks, copyrights and patents. Consequently, there are registration requirements to protect IP rights in Ethiopia. However, Ethiopia is not a party to the Convention establishing the World Intellectual Property Organization. For this reason, IP rights must be registered by the Ethiopian Intellectual Property Authority as per the relevant laws.
(g) Data protection
Ethiopia has not yet ratified its data protection law. However, there are fragmented laws in place which address the right to privacy. A Data Protection Law has reached an advanced stage and is expected to be ratified in 2023.
There is computer crimes legislation that applies to cybersecurity issues.
(i) Real estate
Land in Ethiopia is owned by the public. For this reason, individuals and companies have a long-term leasehold on land. The particular location of the real estate will determine the applicable legislation which governs its ownership status as well as the activities that are permitted on the premises.
3.2 What public searches are commonly conducted as part of due diligence in your jurisdiction?
A company registration search is a commonly conducted public search. This search can be conducted if the tax identification number of the company is identified. The company registration search provides basic information about the company, such as:
- its name and address;
- its general manager; and
- its licence renewal status.
However, the information available on the online system may not be up to date, as this system was only recently introduced.
Searches are also conducted of:
- the collateral registry for movable securities;
- the Land Management Bureau for immovable properties;
- the Ministry of Revenue for the tax status of the company; and
- the records of the National Bank of Ethiopia for blacklisting related to the use of foreign currency.
Other searches require the authorisation of the target.
3.3 Is pre-sale vendor legal due diligence common in your jurisdiction? If so, do the relevant forms typically give reliance and with what liability cap?
Pre-sale vendor legal due diligence is not very common. However, there are some transactions that involve vendor legal due diligence; although this is primarily limited to the corporate existence and licensing of the company.
4 Regulatory framework
4.1 What kinds of (sector-specific and non-sector specific) regulatory approvals must be obtained before a transaction can close in your jurisdiction?
The general approvals that are required before closing a transaction are merger approval and tax clearance. Merger approval is required if the combined annual turnover, assets or registered capital of the merging parties is above ETB 30 million. Depending on the parameters of the transaction, Common Market for Eastern and Southern Africa (COMESA) notification might also be required. COMESA notification dose not replace the notification requirement to the Ethiopian merger authority. Depending on the business sector in which the parties are active (eg, banking and finance), additional approvals may be required from regulatory authorities.
Furthermore, approval from the Ethiopian Investment Commission is also required to verify whether the sector of investment is open for foreign investment.
4.2 Which bodies are responsible for supervising M&A activity in your jurisdiction? What powers do they have?
The Ministry of Trade and Regional Integration and the Ministry of Revenue are the authorities with a mandate to review and approve or reject M&A transactions.
4.3 What transfer taxes apply and who typically bears them?
Depending on the structure of the transaction, capital gains tax or value added tax (VAT) may apply. If there is a capital gains tax liability, it will be the seller that bears this liability; whereas the purchaser will bear the VAT liability.
5 Treatment of seller liability
5.1 What are customary representations and warranties? What are the consequences of breaching them?
The customary representations and warranties that the seller may provide include the following:
- It is the legal and beneficial owner of the assets;
- It has full power and authority to enter into and perform its obligations under the transaction documents;
- It has or will obtain the necessary tax clearance and approvals from the relevant government authorities;
- There are no or a specific number of third-party claims;
- It has disclosed the status of the title deeds and documents of the target;
- It has effected and obtained all necessary registrations, licences and approvals;
- There is no ongoing litigation against it (if litigation is ongoing, details should be provided);
- It has the rights to the relevant IP of the target;
- The accounting standards and financial standing of the target are valid;
- There has been no breach and there is no risk of breach with regard to the material contracts of the target; and
- All information in respect of the target is true and accurate, and not misleading.
Where the seller commits a breach of warranty, the buyer may be entitled to damages and/or to terminate the transaction document.
5.2 Limitations to liabilities under transaction documents (including for representations, warranties and specific indemnities) which typically apply to M&A transactions in your jurisdiction?
The parties to a purchase agreement may limit or agree to impose a cap on the seller's liability for breach of warranty and indemnity claims. A buyer is entitled to claim material damage for the breach of warranty and indemnity claims. In addition, a fixed cap of liquidated damage may be imposed on the purchase agreement. Although they are not common, de minimis and aggregate liability threshold provisions are sometimes used in M&A transactions.
5.3 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?
Warranty and indemnity insurance is not common in M&A transactions in Ethiopia.
5.4 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?
Security, financial/bank guarantees and holdback are relatively common mechanisms which are used to ensure that a seller has sufficient substance to meet any claims by a buyer. Even if it is not common, an escrow arrangement may also be used.
5.5 Do sellers in your jurisdiction often give restrictive covenants in sale and purchase agreements? What timeframes are generally thought to be enforceable?
The parties to a transaction may include restrictive covenants such as non-compete and non-solicitation clauses in sale and purchase agreements. The timeframe for such restrictions is determined by the parties; however, it must not be unreasonably long, taking into consideration the nature of the business.
Trade Competition and Customers Protection Proclamation 813/2013 prohibits agreements between businesspersons that have the effect of preventing or significantly lessening competition.
5.6 Where there is a gap between signing and closing, is it common to have conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?
It is common to include conditions that must be fulfilled in M&A deals in Ethiopia. These include the following:
- All warranties are true and not breached at closing;
- The business has been carried on in all material respects in the ordinary course of business; and
- All necessary regulatory approvals have been obtained at closing.
However, MAC clauses and bring-down of warranties are not commonly included in sale and purchase agreements in Ethiopia.
6 Deal process in a public M&A transaction
6.1 What is the typical timetable for an offer? What are the key milestones in this timetable?
New shares to be offered for public prescription are included in the prospectus signed by the chairperson of the board of directors of the company and approved by the Capital Market Authority. The prospectus must:
- contain all specific terms of the offer; and
- be accurate, sufficiently clear, comprehensive and reasonably specific and timely.
That said, the timetable or the date by when the subscribers must discharge their obligation to pay is determined by the company in the prospectus. The new Ethiopian stock market is in the process of commencing operations and the practical timetable for this matter is yet to be ascertained.
6.2 Can a buyer build up a stake in the target before and/or during the transaction process? What disclosure obligations apply in this regard?
A buyer with more than a 5% interest (directly, indirectly or in alliance with others) in the capital of the target must notify or report to the Capital Market Authority and the stock exchange within 10 days of the date of the change if the change in any interest exceeds more than 0.5% of the target's capital. This reporting obligation remains mandatory until the change results in a decline of the interest to below 5% of the capital.
6.3 Are there provisions for the squeeze-out of any remaining minority shareholders (and the ability for minority shareholders to 'sell out')? What kind of minority shareholders rights are typical in your jurisdiction?
A person that acquires more than the requisite majority percentage of the shares admitted to trading of a listed company must submit, within 30 days of the date of acquisition, an offer to purchase all the remaining shares traded on the exchange. However, if this would harm the interests of the minority shareholders, any shareholder may challenge the resolutions of the general assembly of the listed company.
Moreover, the Commercial Code (2021) includes a provision that grants a majority shareholder the right to squeeze out any remaining minority shareholders. A shareholder holding shares representing 90% or more of the capital of a company may demand that minority shareholders have their shares redeemed by that shareholder. The minority shareholders must transfer their shares to the shareholder within five weeks.
Minority shareholders have the right to:
- obtain full information and inspect the register of the company;
- bring a legal action for damages if they have been personally injured directly due to the fault or fraud of the directors;
- propose an ordinary general meeting for the appointment of a special investigator;
- oppose dealings made between a company and persons/entities affiliated with the company; and
- in the case of shareholders representing 5% of the share capital, request a court to appoint a representative to call a meeting and to draw up the agenda for consideration.
6.4 How does a bidder demonstrate that it has committed financing for the transaction?
There are no legal requirements in this regard. However, the issuer may, through the prospectus or other means, impose an obligation on bidders to show or demonstrate their financial commitment to the intended transaction.
6.5 What threshold/level of acceptances is required to delist a company?
Detailed legislation governs delisting is yet to be issued.
6.6 Is 'bumpitrage' a common feature in public takeovers in your jurisdiction?
Bumpitrage is not a common feature in public takeovers in Ethiopia.
6.7 Is there any minimum level of consideration that a buyer must pay on a takeover bid (eg, by reference to shares acquired in the market or to a volume-weighted average over a period of time)?
Detailed legislation on this matter is yet to be enacted.
6.8 In public takeovers, to what extent are bidders permitted to invoke MAC conditions (whether target or market-related)?
There are no restrictions on including MAC conditions in public and private M&A deals in Ethiopia. Although the inclusion of such conditions in public M&A deal has not been tested, MAC conditions or condition precedents are common in private M&A deal in Ethiopia. The conditions should be stated clearly in the deal documents.
6.9 Are shareholder irrevocable undertakings (to accept the takeover offer) customary in your jurisdiction?
Detailed legislation on this matter is yet to be finalised and issued.
7 Hostile bids
7.1 Are hostile bids permitted in your jurisdiction in public M&A transactions? If so, how are they typically implemented?
Hostile bids are not yet specifically regulated under the existing capital markets laws. However, there are several directives that are currently being drafted to regulate various aspects of the capital markets.
Capital Markets Proclamation 1248/2021 provides that shareholders which are the recipients of a takeover offer must be:
- given reasonable time to consider the proposal;
- provided with adequate information to enable them to assess the merits of the proposal;
- given reasonable and equitable opportunities to participate in any benefits accruing to shareholders under the proposal; and
- accorded fair and equitable treatment in relation to the proposal.
Practical experience and further laws on this matter are still being developed.
7.2 Must hostile bids be publicised?
New legislation which is under preparation is expected to address this matter.
7.3 What defences are available to a target board against a hostile bid?
Please see question 7.2.
8 Trends and predictions
8.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?
The M&A landscape in Ethiopia is currently dominated by private transactions. However, over the past 12 months, new laws and institutions that will facilitate public M&As have been developed.
8.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms? In particular, are you anticipating greater levels of foreign direct investment scrutiny?
In the next 12 months, the remaining laws on the capital markets are expected to be completed; as, potentially, is training on the stock exchange. A greater level of foreign direct investment is expected as a result of potential public-private partnership schemes and the opening of investment sectors in which foreign investment was previously restricted.
9 Tips and traps
9.1 What are your top tips for smooth closing of M&A transactions and what potential sticking points would you highlight?
Understanding the relevant laws and the regulatory approvals that are needed for M&A transactions is vital when structuring transactions in Ethiopia. A critical assessment of the due diligence findings of legal and financial experts is also important in mapping out the steps of the transactions.
The laws governing public M&A in the context of stock exchanges are still under development. It is expected that the stock exchange will become operational in the coming year. For this reason, the practical nuances of public M&As are yet to be experienced.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.